Welcome to the QuidelOrtho Fourth Quarter and Full Year 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note that this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations.

Thank you. Good afternoon, everyone, and thanks for joining QuidelOrtho (ph) fourth quarter and full year financial results conference call. With me today are Doug Bryant, President and CEO; and Joe Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website, and a version of today's presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. The statements we will make during this call that are not strictly historical, including the company's expectations, plans, future performance and prospects are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to a number of risks and uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, and subsequent reports filed with the SEC. Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risks and uncertainties. We cannot assure you that the forward-looking statements we make or are implied by our statements will be realized. Furthermore, such forward-looking statements represent management's judgment and expectations as of today. Except as required by law, we undertake no obligation to update any forward-looking statement or any time-sensitive information to reflect future events, developments, or changed circumstances for any other reason. Also, during today's call, we will discuss certain items that do not conform to U.S. generally accepted accounting principles or GAAP. Please see Slide 3 for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon. Both are available on the Investor Relations page of the QuidelOrtho website. Lastly, unless otherwise stated, all year-over-year growth rates including revenue growth rates given on today's call are given on a comparable constant currency basis. And now, I'd like to turn the call over to Doug Bryant.

Thank you, Juliet. Good afternoon, everybody, and thank you for joining us today for the fourth quarter and full year 2023 earnings call. 2023 was a foundational year for QuidelOrtho. Despite the brevity of the respiratory season in the fourth quarter, we performed well. More importantly, we grew above market in our Labs business, gained market share in our industry leading respiratory point-of-care products, and achieved several internal milestones. Most notably, our operations team made significant permanent manufacturing upgrades, which increased our production capacity and supply chain resilience. This allowed us to address backlogs and positioned us to meet future market demand. Our global sales team is now in place, actively cross selling and we like the strength of our competitive position across the globe. Our combo test continued and continues to [Technical Difficulty] and we've been able to not only gain market share but maintain pricing despite a lower volume season. We received more than 700 regulatory approvals in the U.S., Europe, Middle East and Africa, and China, with an addition of 1,000 approvals in the rest of the world. This includes De Novo 510(k)s for both Sofia 2 SARS antigen and the Savannah platform. Additionally, we identified substantial greater synergies, while investing in the business and paying down $227 million in term loan debt. All these accomplishments help to bolster our already strong competitive position and long-term growth profile. We believe we're well positioned to take additional share in key markets over the longer term. Let me turn to the top line numbers. Starting with the full year 2023, our total revenue was $3 billion, a decline of 26% on a supplemental combined basis compared to the prior year. The year-over-year decline was related to the respiratory -- the lower respiratory season in 2023 compared to the prior…

Thanks, Doug, and good afternoon, everyone. I'll begin with a summary of our operating results for the full year and fourth quarter of 2023, and to facilitate a comparison of the company's operating performance at full year growth rates that I reference are presented on supplemental or all full year growth rates that I reference are presented on a supplemental combined basis as if QuidelOrtho have been combined for the applicable periods. I'm also going to refer to our earnings presentation, which is available on the IR page of our website. Starting with the full year 2023 results on Slide 4, total revenue was $3 billion, a decline of 26% year-over-year. This decline was due to the lower respiratory season in '23 compared to the prior year, with approximately $1 billion impact from declines in COVID-19-related testing. Excluding respiratory revenue, total revenue grew 4% -- grew 5% for the full year. Turning now to the full year 2023 operating results, adjusted gross profit margin was 51%, which was down approximately 800 basis points compared to the prior year due to lower respiratory revenues, again due to lower COVID-19 testing. Adjusted EBITDA for the full year of 2023 was $723 million and adjusted EBITDA margin was 24%. Adjusted diluted EPS for the full year 2023 was $4.13, a 70% decline from the prior year. The year-over-year change in adjusted diluted EPS and adjusted EBITDA was the result of the decline in COVID-19 revenue compared to the prior year as noted earlier. And our full-year effective tax rate was 22.3%. And now I'll provide our fourth quarter results shown on Slide 5. Total revenue was $743 million as reported, which was a decline of 14% year-over-year due to 77 million of COVID-19 headwinds from the prior year. Adjusted gross profit margin was…

Thanks, Joe. 2023 was our first full year operating as QuidelOrtho. We successfully laid the foundation for building our global company, one poised for advancing the power of diagnostics for a healthier future. Building a high-performing organization took a lot of hard work by many of my colleagues. I would be remiss not to thank them for their dedication, perseverance, and the many long hours it took to achieve such important milestones. Looking ahead, I see a bright future for our company, our customers and patient health. We have a growth strategy and an action plan in place. We're accelerating our business efficiency initiatives, cost saving measures, and transformational programs. These efforts, combined with our R&D menu expansion pipeline, global pull-through across our growing installed base, and commercial excellence program, will provide further support to achieve our long-term revenue targets of 6% to 9% top-line growth and 27% to 29% EBITDA margins in 2025. [Technical Difficulty]

[Operator Instructions] The first question is from the line of Andrew Brackmann with William Blair. Your line is now open.

Hi, guys. Good afternoon, and thanks for taking the questions. Maybe to start on guidance, and thanks for all the color there. It does sound like there's been some sort of change in philosophy to setting this annual range versus sort of your process in the past. So, can you maybe just talk to that a little bit? And as a second part here, Joe, you talked about sort of some areas of conservativism there, but any part of the guide that you call out as a little bit higher risk or things need to sort of go your way in order to achieve those. Thanks.

Yeah. Thanks for the question, Andrew. I'll start, and Joe, you jump in. We did see COVID sales in Q3, and then it dropped pretty dramatically. SARS hospitalizations are now down. The severity of the disease clearly not what it once was, and as I mentioned, we don't see any asymptomatic testing whatsoever. So, I think it is absolutely prudent for us to take down the COVID number to the lower end of the range, and that's probably the most dramatic change in philosophy. And I'll let you jump in there, Joe.

Yeah. Thanks, Doug. So just to add on to that point, Andrew, when you think about the margin profile that we had communicated previously of low 50s GP margin and high 20s EBITDA margin, that was really predicated on the endemic COVID revenue being in the high end of the range that we had communicated closer to the $400 million. And so now, having seen what happened in Q4 of [Technical Difficulty] we feel it prudent to pull it down to the very low end of that range, closer to $200 million. And that has about a 300 basis point to 400 basis point impact on the margins just by pulling out that very high margin revenue. And so, we are taking actions to counteract that. But it's going to take a little time to get back to where we want to be. We do expect to get back to where we want to be in 2025. So that is the respiratory -- the big ticket item in the respiratory section. The flu numbers are actually very consistent in '24 with what they were in 2023. The only difference is now you've got the additional respiratory revenue for Savannah that I talked about in the range of $30 million to $50 million, which we expect mostly will come in Q4. And the other areas, RSV and strep, again, they're very similar to what we did in 2023. So I don't see a lot of risk there. And then, finally, moving to the non-respiratory revenue section, we've proven that that's a very predictable part of our business. And you can see that by what we did in 2023 and you can see that we've put a fairly tight range on that in 2024. We feel pretty good about that revenue and where it's going to come out in the 4% to 6% range.

Okay. Thanks for that. And then Joe, maybe just another one for you on the balance sheet and debt level. Looks like leverage is starting to creep up a little bit. Can you maybe just sort of talk about your comfort with the current leverage ratio? Any covenants that we should be taking note of and sort of your plan for debt paydown throughout 2024? Thanks for the questions.

Yeah, Andrew. It's -- the leverage ratio -- the net debt leverage ratio at the end of '23 was at 3.2. But it's really important to note, and you -- if you -- and I'm sure you've all done this, but if you look at the credit agreement and the way that the leverage ratio is calculated, you'll see that we get the ability to add pro forma adjustments like synergies and like headcount reductions that we've talked about. And so, the actual leverage ratio that goes against the covenant is about a half a turn, or maybe even a little bit more than a half a turn more than what the financial statements' straight calculation would give you. So in other words, our credit agreement calculation for leverage at the end of the year is going to be more like 2.6 versus that 3.2 that you calculated. So if you carry that through the end of the year, we should be right around 3 times levered per the credit agreement versus a covenant of 3.5. So it gets a little tighter, but we feel like we're in okay shape, not really concerned there.

Okay. Thanks, guys.

Thank you for your question. Next question is from the line of Alex Nowak with Craig-Hallum. Your line is now open.

Okay. Great. Good afternoon, everyone. So you provided an endemic respiratory rate for 2023 and you were very confident in it throughout the year and sales still came in below that. So before COVID, the Respiratory business for Quidle standalone was roughly $150 million of sales. Now, your endemic rate for 2024, as it's set today, is $460 million to $730 million, now, if you get this endemic rate wrong for 2024, there's a lot of downside. I guess the question is, why do you think this new number is right?

Thanks for the question, Alex. We think we have a pretty good understanding of market size and we think the number of tests starting with flu between 40 million and 60 million makes the most sense. We haven't seen something as low as 40 million in a while and we wouldn't expect at this stage to see something more than 60 million. So, I think we've pegged the market size correct. The question is, what's your market share? Well, our market share actually has increased, and the recent report that we saw this morning, it increased slightly more than that. Well, the other factor is, what's happening with your price? Well, our price basically is flat and we've been able to take share and place Sofia analyzers with that same price. We've also seen a shift towards the combo assay, which is super healthy. So obviously, very difficult to predict this market, which is why we're widening the range.

Now across diagnostics, what other benchtop systems have ramped to 30 million to 50 million of sales on a single test in less than a year? Just that we can use that as a proxy for Savannah at the end of this year.

What other ones…

Yeah. I'm just trying to -- yeah, what gives you the confidence in the $30 million to $50 million revenue range for Savannah Respiratory?

Well, okay. What I would say is, early on, we've seen placements and 100% of our placements have indicated their interest and strong desire to run our respiratory viral panel product. So, 100% of the customers that we've closed and shipped thus far with Savannah, 100% of them are highly likely to order that product as we go into the third and fourth quarter, that's significant. And the number of tests on average that they're running or plan to run is about 3,000 per customer. Flu season with a respiratory season would be Q4, Q1. So if you take the 1,000 analyzers that we intend to place times our assumed price times 3,000 tests, and you assume that holds true, and then you take and you split it evenly between the two quarters, you get roughly to what we're suggesting what we're going to do for Savannah in 2024. So those are our assumptions. You can argue with the assumptions if you like, but those are the facts and those are our assumptions and that's the basis for the number.

All right. Got it. Appreciate the update. Thanks.

Sure. Thanks, Alex.

Thank you for your question. Next question is from in line of Casey Woodring with JPMorgan. Your line is now open.

Great. Thank you for taking my questions. Just on the 21% to 24% adjusted EBITDA margin for this year, I appreciate you quantifying the components driving the year-over-year difference against '23, but was hoping that you can bridge that '24 number to your comment on getting back to where you want to be in 2025. Are you talking about the LRP range of 27% to 29%, and if so, just what assumptions have changed on the base business that's preventing you from getting there, or are you saying today that this step down is all on kind of lower COVID assumptions and this slight Savannah manufacturing headwind in the first part of the year.

We're lowering to be clear, Casey, thanks for the question. We're lowering our guidance on COVID. We think it's prudent, but that has a consequence in terms -- because of mix it has as a consequence [Technical Difficulty] we're going to solve for that. And so if you think about what we've just announced in terms of the headcount reduction, again, that gets us about $50 million, as Joe said, and then you can back into the number if you want, but effectively, we're assuming that we generate another $100 million in savings in 2025 through our QO NEXT initiatives.

And then Savannah becomes more creative with continued growth in 2025.

That's the other factor.

And those are the factors, Casey, that get you back to those high 20s% margin.

Now, what's our confidence in the $100 million? I would say, it's pretty good. We have gone through a diligence phase. We've gone through a business planning phase. We have at this point a plan that totals far greater than 300. And we assume that we should be able -- when looking at the initiatives, we should be able to ensure that we get at least a third of them fully accomplished. That's what's in the number.

Got it. That's helpful. And then, maybe can you talk about North American non-respiratory? It looks like the business slightly declined in 4Q. So curious on how the different business units performed relative to expectations and maybe walk through your expectations by region for the year. You're lapping the China comp with the lockdowns from last year, so just any color?

Yeah. I think it's pretty flat, Casey, because if you're talking about non-respiratory, most of that business is going to be the Triage and the former Beckman business, and that was pretty flat year-over-year to fourth quarter.

Does that actually address your question, Casey?

Yeah. That's helpful. I'll jump back in the queue. Thanks.

Thank you for your question. Next question is from the line of Jack Meehan with Nephron Research. Your line is now open.

Thank you. Good afternoon. First is on the Transfusion Medicine business, so you now have some strategic decisions here, just -- there were headlines in the fall around considering a sale, just considering you've decided to exit U.S. Donor Screening and you're investing in Immunohematology, is it safe to assume kind of a sale process is off the table at this point?

We continue to evaluate all options, Jack. I think it's a great question. I just think when I look at it, you look at the time and effort to do a carve-out on business where we actually are the brand leader. There's a lot of value in that brand strength. When I look at the opportunity to potentially leverage that strength within the medium-sized hospital and help with our strategy, which is focused on the integrated platform, I felt like we would just be giving up too much. And I do think that there are measures that we can take to improve the efficiency in the business, and I do think that with modest investment we can continue to grow the menu. And so, at this time, I don't think it's an asset that we would be willing to give up on so quickly. On the other hand, when you look at the U.S. Donor Screening business specifically, these are the larger factories, if you will. That business is in a market that's flat to declining, not expected to grow. It's a very expensive business to maintain. And by not being in that business over time, I think we get about 100 basis point improvement in our growth rate and I think it helps our margins as well, our profile. So great question, Jack. Our IH business, the immunohematology part of it, I think is a valuable asset that we want to see if we can grow up.

Yeah, Jack. Just...

Sounds good.

In 2023 -- sorry, Jack, I didn't mean to talk over you, but I just wanted to add that in 2023, if you were to exclude the Donor Screening business, our ex-respiratory growth actually would have been 200 basis points higher. So it had a much bigger impact even in 2023.

Got it. Makes sense. And then on Savannah, I just want to understand, I guess, like the gating factors to getting RVP4 approved, does there any -- do you feel like you have all the trial activity you need done at this point? That's number one. And number two, when do you expect to be CLIA Waiver for Savanna? Does that come in conjunction with RVP4 or do you think that's later in the year?

I'll go in reverse order. It's an appropriate question. The CLIA waiver is expected by year end. The status of the submission of the 510(k) is on track per my previous comments. Recall that I had said that we expect to get clearance before the end of the first quarter, I think we're still on track for all that.

Okay. I could squeeze in one final one. Joe, what is the guidance assumed for growth in the China region for 2024?

Yeah. The China region goes back to what we would define more as a normal high single-digit growth. If you go back to before the pandemic with the ortho business, it was high-single digit growth region, it gets back to that.

Okay. Thank you.

Thank you for your question. The next question is from the line of Conor McNamara with RBC. Your line is now open.

Hey, guys. Thanks for taking the questions. Appreciate it. I guess just -- first question, in early January, you guys didn't pre-announce, which typically you have in early January, and given the size of the EBITDA guidance and mis-relative to where folks had come out, was there anything that -- first off, what was your decision not to pre-announce, was there anything that's come up in the last month that kind of surprised you that you didn't know about in January start?

Yeah. Thank you, Conor. The total revenue, we knew, and we knew that we were going to be quite close in understanding that the miss was about 6% or 7% of what we had projected. So we didn't feel like it was something that we could announce. And further to that, I didn't -- I knew for sure I wouldn't have all the answers to all the questions that we would have during the one-on-ones at the conference. And we certainly didn't know where we stood at that stage in terms of EBITDA. So, I could have told you, obviously, that any gain or loss relative to the forecast with respiratory has a bigger impact, I knew that, but we really didn't have the specifics as we went into the conference. That's the only reason.

Got it. Thanks for that, Doug. I appreciate that. And then, Joe, you talked about getting the high 20s EBITDA margins in fiscal '25. And you know that -- is that for the full year, or should we think about that as the things ramp up through 2024 and then exiting 2025, you'll be there as assuming Savannah gets to a high respiratory number, exiting '25? Or is that -- is it realistic to think that's something that's achievable for all of fiscal '25?

Yeah. Hey, Conor. We'll talk more about this in detail at the Investor Day. But at this point, I would say, I do think it's for the full year 2025. We execute as the plan has been laid out.

And as I said, Conor, we're chasing a bigger number than the 100 needed in terms of cost synergy.

Got it. Okay. And just -- sorry, our last question, just housekeeping on the decision to transfer out of the -- get out of the US transfusion business, what -- can you quantify at all the revenue and EBITDA impact to that? And it actually sounds like you're going to reinvest some money. So maybe it's pretty dilutive to EBITDA, but is there any way to quantify the impact there?

Yeah. The revenue -- we've said this, the revenue is about 25% of the total TM business, and the EBITDA margins are in the low single digits. So by exiting this business, it's going to be accretive, both top and bottom line.

Okay. All right. Thanks, guys. Appreciate that.

Thank you for your question. Next question is from the line of Andrew Cooper with Raymond James. Your line is now open.

Hey, guys. Thanks for the questions. Maybe first, just following up on some of the margin dynamics, and this one's going to be a little bit backwards looking. But I guess thinking about respiratory revenues that ultimately came within the range you had provided for the full year. But EBITDA coming some 10% below the low end of the range. Was the low end of the respiratory revenue not actually contemplated in that margin range? Or if so, why not? What were the offsets? Maybe you expected that you might have found that you didn't -- just help us think about the disconnect there between the top line and the prior guidance ranges.

Yeah. Hey, Andrew. It's Joe. You may recall on the Q3 earnings call that I said that we needed to be at the high end of the flu range to hit our numbers that we were talking about on the bottom line. So $230 million to $270 million was the flu range. Doug's right, we did a bit of middle. We did 248, right? But we needed to be at the high end or even slightly above that range to hit our numbers, and we weren't. And in addition to that, there were some estimates on COVID that we came in below as well. And so, the combination of those two things led to the miss.

Okay. And then just on kind of the guide for '24, appreciate the $40 million to $60 million flu as a volume number, the $200 million of COVID as a dollar number. Can you maybe just help us think about sort of the apples-to-apples, whether it's unit volumes or dollars across that respiratory base? And then maybe also where combo fits in that math as you talk about it today, I know historically it was in flu, but just want to make sure we sort of understand what the starting point assumptions are for kind of overall unit volume or dollars.

Yeah. It's a good question. I'm glad you asked because I did want to get through this. So, first of all, just a clarification, and this has not changed. But the combo test for us is included in the flu numbers. Now, we've always included it in flu. It's not in the COVID numbers that we've talked about, the endemic COVID numbers. And you will recall that if you look at what we just put out, the '24 respiratory revenue guide is $460 million to $730 million. So if you pull out an estimate for low end of the range for COVID, you pull out an estimate for RSV and strep that's consistent with 2023 and you pull out the $30 million to $50 million of Savannah, you're going to get a flu range that now is about $160 million to $360 million. And that compares to the $230 million to $270 million that we gave for 2023. So we have -- in response to what happened in Q4, we are widening the range on the low and the high end, so we don't miss. And we've included a realistic high-end that is possible, and that's the $40 million to $60 million. And if you think about sort of historical, where that $40 million to $50 million sits. In Q4 '23, it was a $50 million or 50 million -- sorry, 50 million test market -- size market. And that compares to Q4 '22 is a $57 million size market. And so for '24, we've landed somewhere between, call it, $46 million to $50 million of test file to get to. When you think about like a midpoint of that range, that's a midpoint. If you go between there, between the $40 million and the $60 million.

Okay. Great. I will [Multiple Speakers] stop there. I appreciate it. It does. Thank you.

Yeah. Sure.

Thank you for your question. Next question is from the line of Patrick Donnelly with Citi. Your line is now open.

Hey, guys. Thanks for taking the questions. Joe, maybe another one on the margins. Just given exactly what you were talking about there on the respiratory and COVID piece. Given that that's going to be pretty impactful in terms of the cadence of the year, can you just help us think about the right way to kind of map out margins for the year? Obviously, with the respiratory piece maybe being kind of on the barbell side of 1Q and 4Q, just want to get our heads around the margin piece as the year progresses here.

So, that range -- that wide respiratory range, Patrick is going to give you an EBITDA range of 21% to 24%, as I noted. And as I just said to Andrew, I would probably recommend that we focus on the midpoint of that right now as a realistic place to start. It is going to give you gross margins in the range of high 40s. And again, I think I said this earlier, that the difference between what we were talking about prior to Q4 of gross margins in the low 50s and now high 40s is driven by the drop in that COVID revenue of roughly $200 million. And the impact of Savannah and the launch and the dilutive impact there, that's about 400 basis points between those two items, with about 80% of that being the COVID drop and maybe 20% of that being the Savannah drop or the Savannah dilution, I should say.

Okay. Got you.

But you're going to see in terms of the quarter [Multiple Speakers]. I was going to say, for the quarters, you'll see the same normal cadence of Q1 and Q4 will be higher and Q2 and Q3 will be slightly lower.

Okay. Understood. And then just on the LRP, I know you got a few questions. Is that something you guys are going to be reviewing in the next month into the Analyst Day or you kind of feel good about reiterating it today and then we'll kind of talk at the Analyst Day in more detail? I just want to make sure we're kind of getting the message correct on the margins, that is, sorry.

We're definitely going to go through more detail. Yeah. And so, we're going to attempt to show on March 20th, what the initiatives are, what we're working on, what the milestones are, so that our investors can know that we're on track with what we say. But I would guess [Multiple Speakers] in terms of revenue margin, it would be over probably a three-year window at this stage.

Okay. Thanks, Doug.

Thank you for your question. Final question is from the line of John Sourbeer with UBS. Your line is now open.

Hi. Thanks for taking the question. Just on the Savannah launch, do you still think this has the potential for 250 million revenues three years post-launch or how should we think about this over the long term?

I think that's true. I think you probably heard me comment earlier about the 1,000 placements, et cetera. I think we achieved what we set out to do in 2024. We'll have a really nice start to it. And so, I don't really see that the 250 will be something that will need to change the forecast that is.

Appreciate it. And then just a follow-up here on a clarifying thing, just to confirm you're still including the US donor screening business. What's the impact in the guidance there and just any color on when that would be actually wound down?

Yeah. It's a good question. It's in the guidance. And I think as Doug said earlier, if you were to pull it out, it's about a point impact -- favorable impact on non-respiratory revenue, and there will be a favorable impact on EBITDA margin as well. We'll talk more about that on Investor Day, and we'll give a little more color.

Thanks for taking the question.

Thank you for your question. There are no additional questions waiting at this time, so that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.

Thanks.